I am about to aquire a small convenience store/gas station business with about 20 employees. I am searching for legal, and creative ways to cut payroll costs.

My reasoning behind this is I have been told that due to social service taxes, if for example I pay an employee $8 per hour, I am actually paying him $16 an hour if I run it through payroll. So essentially for every hour I pay an employee I am paying him double.

The only things I can think of to reduce labor costs, aside from cutting back the help are..

Reward employees in gift cards such as Safeway, Fredmyer when they do something good. This would keep moral high, without constantly having to increase their wage. Is this legal? and can I reward them this amount without running it through payroll?

I was also curious as to how end of year bonus's work. Do these bonus's have to be ran through payroll? So if I give an employee an end of year bonus of $1,000, am I actually paying $2,000 out of pocket due to social service taxes ect? Or are bonus's exempt from this.

Any advice on other ideas, and the legality of these two methods would be great.

Seth, you need to get some better advice. Your portion of Social Security on a single person is 6.2%. Your portion of Medicare is 1.45%. Unemployment taxes vary by statee and industry and history of the particular business, but in no case should your costs for "hidden payroll" be above maybe 10%, nowhere near twice as much.

Plus, you are also supposed to consider what you are suggesting as compensation, if the amount becomes significant.

It must differ from state to state. I can assure you my advice is sound considering It comes from an employer who pays wages.

I'm from Oregon, and we are notorious for having crazy taxes. The amount she told me might not have been quite double, but it was much larger than 10%. I believe the exact figure was $15 for every $8 in employee compensation.

You need to get your advice from an accountant or a payroll service on this matter... preferably the accountant.

I am not saying that the employer's advice is not sound, I can just tell you that some people tend to exagerate. We all hate payroll taxes, and sometimes it is just natural to exagerate.

I have heard about Oregon (don't you folks have some type of universal heath care up there... that alone could cost quite a bit.)

At any rate... follow that up and see.

Things like gift cards and the like do not have to be run through payroll, but year end bonuses do. It needs to count toward their earnings for the year, and yes you do have to take out federal, state, and ssn on the bonuses. Anytime you give an employee money, it's to run through the payroll system.

Here is what the IRS says -

Bonuses and awards. Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. These include prizes such as vacation trips for meeting sales goals. If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you.

Employee achievement award. If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length-of-service or safety achievement, you generally can exclude its value from your income. However, the amount you can exclude is limited to your employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. Your employer can tell you whether your award is a qualified plan award. Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay.

However, the exclusion does not apply to the following awards.
A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years.

A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year.


Example.

Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 - $1,600) in his income.

Thanks a lot guys/gal for all the replys. I am learning a ton already..

I am having a little trouble understanding all complexities of the IRS rules you posted Pete. I will read thorugh the post a couple more times and if I still can't understand I will ask more quesitons.

I can save you a lot of time. Most other ways of compensating your employees will also be taxable in some fashion. And they could get you in trouble for trying to circumvent the laws.

Your best bet is to play by the rules, pay your employees in the normal fashin and console yourself that your competition is hindered by the same politically imposed costs.

First: Get an accountant.

Second: Get an accountant.

Third: Get an accountant.

Hope this helps.
gm

P.S. Get an accountant.

This goes back to the importance of hiring a professional. We're using a new accountant and it's amazing the questions he asked for preparing our taxes. Our old accountant primarily does personal taxes and not for businesses. The new accountant will probably save us a couple thousand dollars(legally).